Since the late 1970s, securitization and other forms of structured financings have seen rapid growth in the capital markets of many developed countries. Under this field of finance, cash flow generating assets are transferred to and managed in special-purpose vehicles so as to protect the transferred assets from later interference by the transferor, its creditors or other third parties, which may try to claim the assets during the term of the financing. The special-purpose vehicles then issue fixed income securities such as certificates or bonds, which are sold to portfolio investors. The fixed income securities are backed by the cash flow generating assets and are often rated higher than the credit rating assigned to the transferor.
Securitization techniques have also been applied to borrowers from emerging market countries which seek to tap the deep capital markets of the developed market countries such as the United States and Western European countries. In this case, the objective of the special-purpose vehicles formed to hold the assets that are being securitized is to protect the assets not only from third party creditors but also from the sovereign government of that emerging market country. Sovereign governments have broad powers to freeze the movement of assets which are owned by parties under that sovereign's jurisdiction. Such risks, known as foreign exchange or capital control risks, are problematic to third-party investors located outside the sovereign's jurisdiction that rely on assets located within the sovereign's jurisdiction to recover their investment. This power of sovereigns has caused international credit rating agencies to adopt the concept of a sovereign ceiling, which is the highest credit rating that can be attained by any issuer within an emerging market country for any financial instrument backed by assets which exist within that sovereign government's jurisdiction.
Securitization is the process of aggregating similar assets, such as loans or mortgages, into a negotiable security. The assets being aggregated act as the collateral backing the negotiable security. A security is a kind of financial instrument. A category of securitization, which is referred to as future flow securitization, has been specifically developed for emerging market borrowers for the purpose of avoiding sovereign interference, as well as to protect the assets to be used for repayment from third party claimants. Future flow securitizations function by trapping assets in special purpose vehicles, which are referred to in this patent application as “offshore trusts”. The assets to be trapped are known as future flow receivables which would normally be coming into the jurisdiction of the emerging market country. The special purpose vehicles then secure financing and by using the future flow receivables as collateral. Originally pioneered in the late 1980s by emerging market industrial companies in order to obtain lower-cost financing during an era when regular bond issuance was problematic because of sovereign debt moratorium which prevailed in many emerging markets, the technique of future flows securitization has been adopted by several emerging market banks to securitize receivables which originate from foreign jurisdictions especially developed market countries. Future flow receivables securitized by emerging market banks in the past have involved trade payment rights, credit card merchant vouchers signed by foreign visitors, remittances of overseas workers to their families, and receivables arising out of correspondent bank payment orders also known as diversified payment rights or SWIFT MT103 (formerly SWIFT MT100) transactions The first financial future flows transaction was executed by a Mexican bank in 1995. The capital markets have generally limited the transactions to the two or three largest local banks within an emerging market country because only the largest banks have been able to meet the credit rating agencies' criterion that it will be able to survive as a going concern in the future. Although there have been several future flow securitizations issued by banks in the past, these transactions were limited to pooling the future flow assets of a single bank.
Emerging market countries manage their financial payments with the rest of the world through a system of international correspondent banks. Other countries that trade with emerging market countries usually do not accept that country's local currency for trade payments. Acceptable payments are largely limited to the three major currencies (i.e., U.S. dollars, Japanese Yen or Euros). Accordingly, an emerging market banking system has to deal with foreign banks to manage its supply of foreign currencies used for transactions with the rest of the world. Foreign banks which hold deposits for the emerging market banks, and which transact on their behalf are called international correspondent banks. For example, the payment transactions which could give rise to the foreign exchange (or “FX” for short) to be used as collateral for the securitization financing include those that involve non-documentary trade payments, other payments for export of services, remittances of overseas workers, foreign direct investments, and dividend and interest income of residents in the emerging market country. The payment transactions to be used as collateral assets for the financial securitization originate from international correspondent banks, which perform payment and collection services for the emerging market. Together these international banks comprise the international correspondent banking system. The major international correspondent banks are headquartered in the Group of 7 (as defined by the International Monetary Fund) countries. The foreign-currency accounts with international correspondent banks used by emerging market banks to manage their trade transactions are called nostro accounts.